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Learn with ETMarkets: How to decode the movement of gold and silver through technical and fundamental analysis

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Navigating the ever-changing world of precious metals as gold And money requires a keen eye and a multi-pronged approach. While some traders swear by technical analysis, focusing only on price charts and market sentiment, others prioritize fundamental analysis, delving into the underlying economic factors that influence prices. However, the most successful traders often take a holistic approach by combining technical and fundamental analysis.
Fundamental analysis provides the why behind price movements. This involves evaluating the factors that impact the intrinsic value of precious metals, such as:

Global economic conditions: Economic growth, inflation and interest rates significantly influence the demand for safe haven assets like gold.

Supply and demand dynamics: Changes in mining production, central bank reserves and industrial applications affect the balance of supply and demand, which impacts prices.

Geopolitical Events: Political instability and global conflicts can trigger significant fluctuations in precious metals prices.

By analyzing these fundamental factors, traders can better understand the long-term price direction of precious metals and make informed investment decisions.

Technical analysis focuses on the “how” of price movements. It uses technical indicators and chart patterns to identify trade entry and exit points. Common technical tools used in precious metals trading include:

Moving averages: These smooth price data to identify trends and potential support and resistance levels.

Relative Strength Index (RSI): This indicator measures price momentum and helps identify potential overbought or oversold conditions.

Fibonacci retracements: These retracement levels can indicate areas where prices could find support or resistance after a significant move.

Although technical analysis cannot predict future prices with certainty, it can offer valuable insight into short-term market sentiment and potential trading opportunities.

Risk management:

A holistic approach to trading also involves sound risk management practices. By integrating technical and fundamental analysis, traders can better assess risk-reward ratios, set appropriate stop-loss levels, and manage position sizes effectively. Additionally, staying informed about technical and fundamental factors allows traders to quickly adapt to changing market conditions and mitigate potential losses.
The combination of fundamental and technical analysis creates a synergistic effect. Fundamental analysis provides context and rationale for a long-term investment thesis, while technical analysis helps determine entry and exit points within that framework.

For example, a trader could identify strong economic tailwinds for gold prices through fundamental analysis. However, they could use technical analysis to wait for a pullback and a favorable entry point before buying.

By adopting both technical and fundamental analysis, traders gain a comprehensive understanding of the market dynamics impacting precious metals prices. This synergistic approach allows them to make informed investment decisions and navigate the complexities of the precious metals market with more confidence.

Remember: this approach does not guarantee success and the market is inherently unpredictable. Always research thoroughly, manage risks effectively, and never invest more than you can afford to lose.

(The author is vice president Raw materials & Currency at LKP Securities)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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